Overview

One of the key measures of any cryptocurrency portfolio is performance. In the world of finance, there are several measures of performance. The simplest is return on investment (ROI), or the delta between the end market value of an investment and the initial investment amount. The problem with simple ROI is that it doesn’t account for cash flows (e.g. additional investments over time, withdrawals of proceeds, and reinvested proceeds).

To solve these problems, the finance world typically uses two rates of return:

  • Time-weighted rate of return (TWR): a measure of the compound rate of growth in a portfolio (also called geometric mean return). TWR is intended to strip out the effects of cash flows (i.e. deposits and withdrawals) that a client has made so that pure investment performance directly attributable to an investment manager/roboadvisor’s strategy is measurable
  • Money-weighted rate of return (MWR): a measure of the performance of a portfolio incorporating the size and timing of cash flows

In the case of CoinTracker, since the end user is controlling the deposit/withdrawal schedule into/out of crypto and the primary goal is to see how much overall money was made by investing in cryptocurrency, we display an overall money-weighted return for your portfolio.

Definitions

  • Total Return (all time return): how much money you have made on your cryptocurrency investing. In technical terms, this is the cumulative money-weighted return (MWR) or performance of your cryptocurrency portfolio over all time incorporating cash and crypto flows such as new deposits, reinvested proceeds, and withdrawals
  • Market Value: current value of all cryptocurrency assets in portfolio
  • Total Deposits: cumulative fiat used to purchase cryptocurrency plus the market value of received cryptocurrency at the time it was received (note: received cryptocurrency includes staking income, mining income, gifts received, payments received, etc.)
  • Total Proceeds: cumulative fiat proceeds from selling cryptocurrency + fair market value of sent cryptocurrency at the time it was sent (note: sent cryptocurrency includes crypto sent to a third party as a donation, gift, payment, etc.)
  • Reinvested Fiat: fiat proceeds from selling cryptocurrency that are reinvested back into purchasing more cryptocurrency
  • Net Deposits (aka reinvestment-adjusted deposits): total deposits minus reinvested fiat
  • Net Proceeds (aka reinvestment-adjusted proceeds): total proceeds minus reinvested fiat

Total Return Calculation

Examples

Let's take a look at some examples to see how total return (MWR) is calculated for your CoinTracker portfolio.

Simple Example

Say you buy 1 bitcoin (BTC) for $5,000, sell half the BTC for $3,000, and then buy another bitcoin for $4,000. Here's how your return would be calculated:

Notice that your return is 0% after the first purchase (row #1), because the fair market value of your bitcoin at the time of the purchase, is the same as the amount you paid for it — $5,000. You started with $5,000 and ended with 1 BTC worth $5,000, so the MWR is 0%.

After you sell 0.5 BTC for $3,000 (row #2), you now have 0.5 BTC left (worth $3,000), plus $3,000 of fiat proceeds — $6,000 worth of assets total. You have gained $1,000 on the original $5,000 you put into crypto, so your MWR is 20%.

Finally after you make an additional purchase of 1 BTC for $4,000 (row #3), you now have 1.5 BTC (worth $6,000). You put in $5,000 - $3,000 + $4,000, or $6,000 of fiat into crypto. Therefore after step #3, your MWR is 0%.

Mining Example

Let's say you mined 1 BTC worth $5,000 at the time you receive it and then make some crypto sells and buys:

After you mine the bitcoin, you have 1 BTC worth $5,000. From a return perspective, this is the equivalent of buying 1 BTC for $5,000 because you have the option of cashing that BTC for fiat at that moment, but instead you are depositing it into your cryptocurrency portfolio. Therefore your MWR is 0% just as it was after step #1 in the simple example.

Next, you sell 0.5 BTC for $6,000, leaving behind 0.5 BTC (worth $6,000). You have no deposited $5,000 worth of crypto and currently have $6,000 + $6,000 of BTC, or $12,000 of assets. Therefore your MWR is 140%.

After that you buy 1 BTC for $2,000 and you have now put in $5,000 of crypto + $2,000 of fiat, but that's reinvested fiat from your $6,000 of proceeds from step #2 (even if you didn't use the exact same USD, from a performance perspective it's reinvested fiat). Therefore you have put in a net total of $5,000 of crypto and your net proceeds are $6,000 - $2,000 (reinvested fiat) + $3,000 of crypto or $7,000 total, for a total MWR of 40%.

Finally after you purchase another 1 BTC for $5,000, you have now fully exhausted your net proceeds ($4,000 remaining) and have an incremental $1,000 of new fiat deposits. So your net deposits are $6,000. Your 2.5 BTC is now worth $12,500 and you have zero net proceeds left. Therefore your MWR is 108% (12,500/6,000 - 1) * 100%.

Gift/Trade/Send Example

Looking at one level of complexity further — gifts, trading, and sending cryptocurrency:

In step #1, you receive one bitcoin worth $5,000 as a gift. Like mining, this is functionally equivalent to buying one bitcoin worth $5,000 from a performance perspective because you have the option of liquidating the bitcoin but instead choose to deposit it into your portfolio. Therefore your MWR is 0%.

After step #2, if you then sell 0.5 BTC for $2,000, you are left with 0.5 BTC worth $2,000 and $2,000 of fiat proceeds ($4,000 total) against the $5,000 value of the original gift. Therefore your MWR is -20%.

At step #3, you trade your remaining BTC for ETH. At that moment, the fair market value of your cryptocurrency hasn't changed, so neither does your return. MWR is still -20% (note: it would change if the fair market value of your ETH changes).

After step #4 you buy an additional 5 ETH for $5,000, so you now have a total of 10 ETH worth $10,000 (market value) plus $2,000 of fiat proceeds minus $2,000 of re-invested fiat (going back into the purchase from this step). Therefore your net proceeds are $10,000 + $2,000 – $2,000 = $10,000. Your net deposits are $5,000 (initial gift) + $5,000 (purchase from step #4) – $2,000 (re-invested fiat) for a subtotal of $8,000. Therefore the overall return is (($10,000/$8,000 – 1) * 100%) → MWR is 25%.

Finally after step #5, you send all your 10 ETH to a third party. Since it's going to someone else (not a gift), it's treated as a disposal (e.g. in exchange for goods and services) and therefore the equivalent of selling the ETH for USD at fair market value. So you now have zero crypto, $5,000 (proceeds equivalent from this sale) + $2,000 (proceeds from step #2) – $2,000 (re-invested fiat from step #4) for a subtotal of $5,000. Your net deposits are now: $5,000 (initial gift) + $5,000 (purchase from step #4) – $2,000 (re-invested fiat from step #4) = $8,000. Therefore the overall return is (($5,000/$8,000 – 1) * 100%) → MWR is -37.5%.

Performance Metrics

CoinTracker displays two sets of performance:

  • Total Performance
  • Unrealized Performance

By default, CoinTracker shows Total Performance — your total money-weighted return (MWR) over all time. The chart plots the numerator of this ratio in blue (your cryptocurrency market value + net proceeds) and the denominator of this ratio (your net deposits) in a dotted orange line:

In simple terms you can think of your total performance as how much money you made or lost investing in cryptocurrency. Your return — the amount of money you have made — is the difference between the blue line and the orange dotted line (or lost if the orange dotted line is above the blue line).

By selecting the blue button on the top right of the performance page, CoinTracker also makes available your Unrealized Performance, or your return on the cryptocurrency you are still holding (excluding profits you have already realized, or taken out of cryptocurrency). The chart plots the market value of your currently held cryptocurrency assets in blue and the cost basis of those assets in a dotted orange line:

In simple terms, you can think of unrealized performance like your tax chart. It shows the difference between how much your crypto is worth and how much you paid for it. This difference is the capital gain (is the blue line is above the dotted orange line) or capital loss (if the orange dotted line is above the blue line), which will result in how much tax is owed.

If you never sell cryptocurrency for fiat, and never send cryptocurrency to third parties, your unrealized performance and total performance will be the same.


Additional Resources

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